Do you have back taxes that you’re unable to pay all at once? The good news is that the Internal Revenue Service (IRS) offers several avenues to help taxpayers manage their tax debt. One such solution is a payment plan, also known as an installment agreement. This article will guide you on how to negotiate payment of back taxes with the IRS, the essential steps involved, eligibility criteria, and practical tips for successfully setting up such an agreement.
IRS Installment Agreements: An Overview
An installment agreement with the IRS allows you to pay your taxes over time in monthly increments. This option can provide much-needed breathing room, especially for those facing financial hardship. According to the IRS, there are three types of payment plans: short-term payment plans, long-term payment plans, and the Offer in Compromise.
Short-term Payment Plans
Short-term payment plans, also known as 120-day payment plans, are an ideal solution for individuals or businesses who can pay their entire tax debt within four months. This arrangement is comparatively easier to obtain and has no additional setup fees. However, interest and penalties will continue to accrue during this period. Short-term payment plans can be applied for online or over the phone, and payments can be made via electronic funds withdrawal, electronic payment options, or mailed checks.
Long-term Payment Plans
Long-term payment plans, commonly referred to as installment agreements, are designed for taxpayers who require more than 120 days to pay their tax debt in full. The IRS offers two types of long-term payment plans: Direct Debit and Payroll Deduction. Direct Debit agreements involve automatic monthly payments from your bank account, while Payroll Deduction agreements require your employer to deduct payments from your paycheck and send them to the IRS directly. Although there might be setup fees, they offer the convenience of automatic payments and reduce the risk of defaulting on plan terms.
To qualify for a long-term payment plan, individuals must owe $50,000 or less in taxes, penalties, and interest and have filed all required tax returns. Businesses must owe $25,000 or less in payroll taxes and have submitted all tax returns. Generally, long-term payment plans don’t exceed 72 months.
Offer in Compromise
An Offer in Compromise (OIC) is an agreement that allows taxpayers to settle their tax debt for less than the full amount owed. This option is considered when paying tax liabilities in full would result in significant financial hardship. The IRS evaluates each OIC on a case-by-case basis, carefully reviewing factors like income, expenses, assets, and the taxpayer’s ability to pay. Keep in mind that the application process for an OIC is rigorous and requires extensive documentation.
Understanding your situation and choosing the right IRS installment agreement can provide relief in managing your tax debt. Whether you opt for a short-term payment plan, long-term payment plan, or Offer in Compromise, consider seeking the help of a tax professional to ensure you are aware of your options and the implications associated with each. By selecting the appropriate installment agreement, you can regain financial stability and comply with your tax responsibilities.
Steps to Negotiate a Payment Plan For Back Taxes
Negotiating a payment plan with the IRS involves understanding your financial situation, choosing the appropriate plan type, and ensuring timely payment. It is a structured process that requires careful consideration. Here are the key steps:
Step 1: Analyze Your Outstanding Tax Liability
Your tax debt determines your eligibility for payment plans. Analyzing your tax liability would include understanding the amount owed, including tax, penalties, and interest. For individuals, the combined liability should be $50,000 or less, while businesses should owe less than $25,000 in payroll taxes. Also, make sure that all required returns have been filed.
Step 2: Decide On A Payment Plan
The IRS offers short-term payment plans (120 days), long-term payment plans (also known as installment agreements), and Offers in Compromise. The short-term plan is suitable if you can pay the full amount within 120 days. Long-term plans are for situations where more time is needed. Under these plans, payments are made over several months, often spanning years. The Offer in Compromise is a more complex solution, allowing you to settle the tax debt for less than the full amount owed.
Step 3: Apply for the Payment Plan
- Individuals: If you are eligible for a short-term payment plan, you can apply online. If applying for a long-term payment plan, you would need to pay a setup fee that varies according to the payment mode.
- Businesses: Businesses owing $25,000 or less can also apply online. If the owed amount exceeds this, you need to fill out a Form 433-F, Collection Information Statement.
Step 4: Follow the Terms of the Agreement
Post-approval, it’s crucial to abide by the terms of the installment plan. This means making all agreed monthly payments on time, filing future tax returns, and paying future taxes in full and on time. Non-compliance may result in termination of the agreement by the IRS.
Step 5: Review Your Agreement Annually
Your installment agreement should be reviewed annually. This review will help adjust for changes in your financial standing, either increasing or reducing your monthly payment amount based on changes in income or expenses.
Step 6: Work Towards Reducing Your Tax Debt
While adhering to the installment agreement, you should also try to reduce your tax debt. This could involve paying more than the agreed minimum monthly installment whenever possible and checking for opportunities to minimize future tax liabilities.
Navigating these steps can be complex but becomes easier with the help of tax professionals. They can guide you through each stage, help you make informed decisions, and play a crucial role in the successful negotiation of a payment plan with the IRS.
Eligibility Criteria for IRS Payment Plan
The Internal Revenue Service (IRS) provides the option of tax debt payment over time to ease the burden on taxpayers. However, to be able to take advantage of this option, there are several fundamental eligibility requirements to meet. It’s crucial to ensure you qualify before starting the payment plan negotiation process with the IRS.
Below we break down the prerequisites for individuals and businesses considering an IRS payment plan.
Individuals
For individual taxpayers, the eligibility for an IRS payment plan is twofold:
- Debt Amount: The combined tax, penalties, and interest an individual owes must not exceed $50,000. This sum encompasses any outstanding tax from previous tax years, any penalties for late payment or non-filing of tax returns, and the accumulated interest on these amounts.
- Tax Filings: The individual must have filed all necessary tax returns up to the current year. This is crucial because the IRS needs to have a clear overview of your tax history and your current tax obligations.
Businesses
The eligibility criteria for businesses are slightly stricter:
- Debt Amount: Businesses are required to owe less than $25,000 solely in payroll taxes. This makes it pertinent for businesses to keep a close eye on their payroll tax obligations to ensure they qualify if the need arises.
- Tax Filings: Similar to individual taxpayers, businesses must have filed all necessary tax returns. It’s a categorical requirement for businesses because the IRS needs a comprehensive picture of the company’s tax history and existing liabilities.
It’s worth noting that these basic qualifications do not guarantee that the IRS will accept a proposed payment plan. The IRS is likely to evaluate your unique financial situation – your income, expenses, ability to pay, and assets – to understand your capacity to meet the plan’s obligations.
Understanding and meeting the eligibility criteria is a crucial first step in negotiating a payment plan with the IRS. Navigating these prerequisites can be challenging, but tax relief experts can be invaluable in understanding your eligibility and guiding you through the negotiation process.
Practical Tips for Negotiating Payment of Back Taxes
Negotiating payment of back taxes can feel overwhelming, but being proactive and following a sound strategy can help settle your tax debt. Here we share some practical tips to guide you through the process:
Be Prompt and Compliant
Take immediate action once you receive any communication from the IRS about your unpaid taxes. The more time you take to address the issue, the higher the chance of accruing penalties and interest. Additionally, ensure that all your tax filings are complete and up-to-date, so you can demonstrate your willingness to comply.
Review Your Records
Go through your financial records to double-check the amount the IRS says you owe. Mistakes can be made, so ensure the information is accurate and matches the IRS’s records. Notify the IRS immediately if any discrepancies arise.
Understand Your Tax Debt
To create an effective payment plan, you need a clear understanding of your tax debt’s various components. Familiarize yourself with the taxes owed, such as federal income tax, self-employment tax, or Medicare tax, as well as any penalties and accumulated interest.
Consider Professional Help
Seeking the assistance of a tax professional, like a Certified Public Accountant (CPA) or an Enrolled Agent (EA), can be invaluable in ensuring your negotiations are successful. They know how to navigate the process and work with the IRS to secure the best possible outcome based on your situation.
Communicate with the IRS
Maintaining honest and open communication with the IRS can strengthen your case and showcase your willingness to fulfill your tax obligations. By diligently responding to IRS notices and inquiries, you’re more likely to secure a favorable payment arrangement.
Be Realistic About What You Can Pay
An essential part of the negotiation process is evaluating your financial situation and deciding how much you can realistically pay monthly without defaulting. The IRS will assess your ability to pay based on the information you provide during negotiations, and making achievable payments boosts your credibility.
Don’t Hide Your Assets
Trying to hide assets from the IRS can result in serious consequences, including criminal charges. An IRS audit may uncover any hidden assets anyway, so it’s best, to be honest about your financial situation from the start.
Explore Alternatives
Apart from the typical payment plans, explore other options like temporary suspension of collection actions (if you’re in a financial crisis), Partial Payment Installment Agreements, or Offers in Compromise. Each option has specific requirements and benefits, so it’s crucial to understand which alternative best suits your situation.
By adhering to these practical tips, you’re better equipped to face the challenge of negotiating payment of your back taxes. Being proactive and well-informed while working with the IRS will increase your chances of achieving a payment arrangement tailored to your circumstances.
How Creative Tax Solutions Can Help
Navigating the complexities of negotiating a payment plan with the IRS can be challenging. That’s where Creative Tax Solutions comes in. We are a professional tax relief service company dedicated to providing high-quality accounting, tax, and advisory services.
With a team of experts, including Thomas Patti, Marla Klein, Adam Hastie, and Don Murry, Creative Tax Solutions boasts a wealth of experience in handling tax problems, including negotiating with the IRS. We aim to help our clients regain control of their finances, mitigate stress, and refocus on their personal and business futures.
With over 20,000 clients served and highly rated on TrustSpot, Creative Tax Solutions offers free consultations with no obligation. If you have difficulty negotiating a payment plan with the IRS, Creative Tax Solutions can be an invaluable resource.
In conclusion, if you owe back taxes and have trouble paying the amount in full, you can negotiate a payment plan with the IRS. This process requires you to understand eligibility criteria, follow specific steps, and maintain your future tax obligations. However, you don’t have to navigate this process alone. With the assistance of professionals like those at Creative Tax Solutions, you can effectively negotiate payment of back taxes and regain financial control.